Update No. 43 – 20/01/12

The start to the year has been better than anyone could have expected in respect of the performance of financial markets.  The S&PASX200TR index is up 4.52%, EGP Fund No. 1 Pty Ltd is only up 3.23%.  I have done a little more buying this week and I am hopeful that reporting season will bring some very kind results.

I have heard a variety of reasons posited for why Australia escaped the GFC so relatively unscathed.  Most point to a history of surplus budgets handed down by the Howard Government (either through sound economic management or ‘luck’ due to Chinese economic growth, depending on your political persuasion – I’ll leave you to decide) in the lead up to the GFC, which enabled the Rudd Government to enact a huge stimulus package (without the subsequent public debt/GDP other advanced nations suffered), meaning we did not have a ‘technical recession’, or 2 consecutive negative growth quarters.

I believe one under-considered factor is the Employment to Population (E/P) ratio.  This rarely reported statistic measures the proportion of working age persons (usually defined as the 15 – 65 age group) gainfully employed.  Now, like all statistics, it can be somewhat pliable (for example, 1 hour of gainful employment in a week sees you on the ‘employed’ side of the ledger), but there is a startling correlation between the economies with high or growing E/P ratios and avoidance of the worst of the GFC.  Now, there are a variety of cultural and economic policy factors that drive this ratio, but we will examine a few examples of how countries with different E/P ratios fared.

Australia, for example in the mid 1990’s had an E/P ratio of about 64 or 65%, meaning just under 2/3 of working age persons were ‘gainfully employed’ at that time.  By the start of the GFC, this figure was closer to 73% or nearly 3/4.  Other countries that fared well during the GFC were Switzerland, who maintained an E/P ratio of over 75% since the mid 1990’s.  Denmark/Norway/Sweden & Finland as a group fared quite well and had E/P ratios rising from about 72% in the 1990’s to about 75% by the GFC.  German E/P ratio in the same period grew from about 65% to about 70%; they seem to be travelling fairly well economically post-GFC.

Consider some countries that have suffered, starting importantly with the US, which despite a fairly high 72% E/P mid 1990’s and economic tailwinds for (most of) the next 15 years (and improvements in OECD E/P ratios) entered the GFC at about 71% and fairly quickly fell to about 66%.  Some of the other very weak European economies – Spain, Greece, Italy and Hungary entered the GFC with E/P ratios at or near 60%.

There are a couple of notable exceptions to this, one of the countries with the highest E/P ratio’s in the world at the commencement of the GFC was Iceland, yet it suffered terribly, mostly because such a huge portion of its GDP was tied up in the finance industry, Ireland was similarly affected.  Examples in the other direction (i.e. with poor E/P ratios yet good economic health) include Turkey, who are performing very well economically, yet maintain an E/P ratio below 50%. Turkey is still an emerging and comparatively poor economy, growth from this lower base is more easily achieved despite some factors being apparently negative – imagine what a long, sustained boom the Turkish could see if they could steadily grow that E/P figure to say 65%.

Despite these noted exceptions, one of the best predictors for maintaining relative economic strength during a sharp downturn must be the E/P ratio.  As such, I think it should be an area of economic focus for all governments.  It is intuitively so I think, if more people are contributing economically, less people are obviously available to draw-down, it is a virtuous circle.

I recall the cheer in my heart through the late 1990’s and early 2000’s here in Australia as I observed slovenly/unmotivated types both known and in some cases (unfortunately) related to me encouraged back into the workforce by policy changes which tightened the availability of some types of welfare payments.

The fact that Australian unemployment halved between the mid 1990’s and the 2007 start of the GFC wasn’t the real triumph for the Australian economy.  It was infinitely more remarkable for the fact that through that whole period, the proportion of working age people seeking employment also steadily grew, so the total GDP per capita grew (partially) simply because there were less people siphoning of the productivity of the working – Tony Hansen 20/01/12.

*Unaudited price will be confirmed via external audit as soon as possible.

EGP Fund No. 1 Pty Ltd. Up by 3.23%, lagging the benchmark by 1.29% since January 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Down by 0.63%, leading the benchmark by 8.8% all-time (April 1^st 2011)